Lehman Brothers Holdings Inc. raised $6 billion to help survive the collapse of the mortgage market after reporting a $2.8 billion second-quarter loss, the first since the company went public in 1994.
The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6. The New York-based company sold about $130 billion of assets in the quarter and cut mortgage-related holdings and leveraged loans by as much as 35 percent.
Chief Executive Officer Richard Fuld, who said he was ``very disappointed'' with the results, is adding to the $8 billion he raised since February to quell concern that the global credit-market contraction would bring his firm down. Lehman's loss was three times bigger than the most pessimistic analyst surveyed by Bloomberg, though it was still just one fifth the losses reported by rival Merrill Lynch & Co.
``It's kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``They've got to start thinking about selling a strategic stake or selling the firm because there's just not enough business to go around.''
Lehman dropped $3.01 to $29.28 at 1 p.m. in composite trading on the New York Stock Exchange, and fell to as low as $28.50. The stock is the worst performer this year in the 11- company Amex Securities Broker/Dealer Index.
Common and Preferred
The share sale included $4 billion of common stock priced at $28 apiece and $2 billion of preferred stock that converts to common shares in three years. The sale was oversubscribed in New York, people close to the firm said.
Banks and brokerages have raised more than $290 billion to make up for almost $392 billion in writedowns and credit losses since the start of last year, according to data compiled by Bloomberg.
Lehman's discounted share offering was ``the least-good option,'' Douglas Ciocca, a portfolio manager at Renaissance Financial Corp. in Leawood, Kansas, said in an interview with Bloomberg Television. ``I would have rather seen more committed capital with a significant discount.''
Lehman had been talking to at least one U.S. pension fund and an overseas investor about taking a stake in the company, a person with knowledge of the matter said last week. Most of those buying shares today were U.S. institutional investors, Chief Financial Officer Erin Callan said in an interview. She wouldn't identify them.
Sufficient Liquidity
In a conference call with investors today, Callan said the firm's discussions with investors and creditors are no longer about ``viability.''
``We've put that to bed on a number of different levels,'' she said. The talks now center on the profitability of investment banks in general, Callan said. Creditors aren't worried about whether they'll get paid, she said.
Moody's Investors Service changed its rating outlook on Lehman to negative after the earnings announcement, saying ``the newly revealed vulnerability of the secured funding model may warrant negative rating action on Lehman and on other independent investment banks.''
Moody's rates Lehman A1. Standard & Poor's lowered its rating on Lehman to A from A+ last week, and Fitch Ratings today cut its assessment to A+ from AA-.
Cash Holdings
Lehman had $3.7 billion of writedowns on its portfolio of mortgage-related assets and leveraged loans during the quarter as hedges against the positions lost money, the bank said. Cash holdings increased to $45 billion from $34 billion at the end of the first quarter.
``The loss was greater than expected but the capital raise is also a little bit greater than people had anticipated, which I think makes for a net positive,'' said David Killian, a portfolio manager at Stoneridge Investment Partners in Malvern, Pennsylvania, which overseas $600 million including Lehman shares.
All the figures were preliminary, with final results for the three months ended May 31 set for release on June 16.
Revenue was wiped out by the writedowns, which cut fixed- income results to negative $3 billion. Equity trading dropped 65 percent to $600 million due to writedowns on private-equity stakes, Callan said. Excluding the charges, equities revenue was about $1 billion, Callan said, down from $1.4 billion a year earlier.
Investment Banking
Investment-banking revenue fell 25 percent to $900 million, and asset management rose 13 percent to $900 million. The firm continued to gain market share in mergers advice, underwriting stock offerings and fixed-income trading, Callan said.
Revenue declined in many businesses because of industrywide trends, Callan said. Several businesses virtually shut down in March, and have been picking up slowly since, she said.
Lehman, founded in 1850 by German immigrants, has dropped 55 percent this year as concern about the deteriorating value of mortgage securities pushed Bear Stearns Cos., Lehman's smaller rival, to the brink of bankruptcy. Bear Stearns agreed to be acquired by JPMorgan Chase & Co. in March and the Federal Reserve stepped in to finance some of Bear Stearns's assets and provide other securities firms with emergency loans.
Since the collapse of Bear Stearns, Lehman has been reducing its ratio of assets to equity, known as its leverage ratio. The firm sold about $20 billion of mortgage-related assets during the quarter, Callan said. It has no plans to sell assets further and the ``de-leveraging process is complete,'' she said.
With today's capital increase, the gross leverage ratio dropped to 22. Return on assets increased while the level of assets was reduced, which will help the firm provide a return on equity in the ``mid-teens,'' Callan said.
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